Guiding Principles in Managing Risk

Howard Kunreuther and Michael Useem of The Wharton School, University of Pennsylvania have developed a set of guiding principles in characterizing and developing strategies and leadership for perceiving, assessing, and managing risks associated with extreme events. These principles apply not only to leadership in averting and responding to natural catastrophes but also to leadership facing other extreme events, whether terrorist attacks, financial crises, or governance failures.

• Principle 1: Appreciate the importance of estimating risks and characterizing uncertainties surrounding such estimates. For developing the strategies and leadership for reducing and managing a specific risk, it is essential to have reliable estimates of the likelihood of the event and its consequences.


• Principle 2: Recognize the interdependencies associated with risks and the dynamic uncertainties associated with the interdependencies. Many factors contribute to extreme risk, and they are connected through ever-changing linkages. For disaster strategies and leadership, understanding the evolving interconnections can be very challenging because the linkages are often hidden or indistinct.


• Principle 3: Understand people's behavioral biases when developing risk management strategies. Among the well-documented biases are misperceptions of the likelihood of catastrophic events, a focus on short-term concerns and returns, and falsely optimistic confidence that a calamity will simply not happen on my watch - - the NIMTOF (not in my term or office) phenomenon. Appreciating such biases is an important step for creating remedies and building cultures that can reduce or eliminate them.


• Principle 4: Recognize the long-term impact of disasters on a region's or nation's politics, culture, and society. Catastrophes often create enduring change in areas far from the epicenter in ways that public and private leaders need to appreciate in taking preventive measures prior to a disaster and use to their advantage in developing strategies following a catastrophic event.


• Principle 5: Recognize trans-boundary risks by developing strategies that are global in nature. Most disasters do not recognize political borders. For example, the terrible Southeast Asia tsunami of 2004 killed residents of 11 countries.


• Principle 6: Overcome inequalities with respect to the distribution and effects of catastrophes. Whether natural or human caused, disasters often bring disproportionate hardships to those already at risk from low income or poor health. Public policies and private actions can help prepare a readiness plan on the part of those with more financial resources to support those in distress with fewer resources.


• Principle 7: Build leadership for averting and responding to disasters before it is needed. The best time to create a readiness to face and overcome a low-probability, high-consequence disaster is before the event occurs. Leadership development is a time-consuming and labor-intensive process, and investing in it now can be seen as a preemptive and cost-effective measure to ensure that the six principles above are turned into active practice.